An Offer in Compromise (OIC) is a longstanding program that was put in place by the IRS aimed towards helping individuals eliminate tax debt burdens that are too large for them to pay back. It is a consideration that is only allowable under certain circumstances where the government doesn't believe it would receive payment of the tax burden otherwise.
Usually, the IRS is willing to levy an OIC for you if you wouldn't be able to pay the full tax liability or if doing so would put you under a severe financial strain.
How do I Qualify for an IRS Offer In Compromise?
To be considered for an Offer In Compromise, the IRS is going to be looking for one of three different claims to be made by you:
Doubt as to Collectability
This is the claim that, although the tax imposition is validly placed, you will not be able to pay the tax burden in full.
Doubt as to Liability
This is the claim that you don't feel that you are responsible for the tax burden because of reasonable doubt surrounding its imposition.
Effective Tax Administration Claim
In this instance, a debtor does not argue that he or she is, either, unable to pay the tax nor being improperly assessed the tax, but rather that the IRS would "create an economic hardship" by collecting the debt.
Expect a Review of Your Claim by the IRS
After making one of these three claims, the IRS will review your case. In doing so, they are going to be looking for a couple of different things listed below:
1. Ability to Pay - The IRS will examine your assets, as well as your current and future cash flows, to see if you are truly incapable of paying the debt as currently required.
2. Financial Picture - While the IRS will allow a person with any income level to apply for an OIC, they are going to check to make sure that the grant of the OIC is warranted relative to your situation (i.e., current income versus current expenses).
If the IRS completes a review of these items and feels that your claim for an OIC tax settlement is warranted, they may be willing to strike a deal with you. However, the IRS will attempt to collect the most that it can from you during the remaining time that it is allowed to collect by law.
In fact, the IRS may even go so far as to budget out your monthly spending and require you to stick to their budget. This will ensure that a specific amount is left over each month to repay them.
Before the IRS can consider the tax settlement offer that you make them, they require that you be current with all of your tax paperwork (i.e. filings and returns). Furthermore, you must not be in an open bankruptcy proceeding to be considered.
Assuming that you are up-to-date on your paperwork, you may complete the OIC Pre-Qualifier on IRS.gov to confirm that you are eligible for the program and to submit a rough draft proposal.
For all other steps about the Offer in Compromise process, please see the OIC Booklet--Form 656-B--which is available in PDF format on the IRS website.
What Constitutes a Completed IRS Offer in Compromise?
To complete your OIC agreement, you will need the following items:
- Fill out Form 433-A if you are an individual and Form 433-B if you are a business.
- Along with Form 433, submit a Form 656 for each individual and business tax debt (i.e. S. Corp, LLC, etc.) that you possess
- Submit a $186 application fee (which can't be refunded)
- Submit initial payments for each Form 656 that you attach to your application.
While the IRS considers your offer, you may choose to address payment in one of two ways:
1. Submit a lump sum initial payment of 20% of the total offer. Wait for the IRS review and then submit the remaining balance due in five or fewer payments.
2. Submit your initial proposed monthly installment and then continue to make monthly installments as the process is under review by the IRS.
During the time that your offer is being considered:
- Non-refundable payments submitted as part of the application process will be accounted for on balance due.
- Your collection period is extended.
- The IRS will automatically accept your offer if no decision is made within two years.
- If your offer is rejected for any reason, you may appeal the decision within 30 days of rejection using Form 13711.
For any other assistance or information, please contact your assisting attorney and visit IRS.gov
for all other queries.